Comparative Effectiveness Research (CER) Policies and the Potential Threat to Pharmaceutical Innovation

As health care reform evolves and takes shape, comparative effectiveness research appears to be one of the central topics on the national health care agenda. Over the past couple of years, comparative effectiveness has been explicitly incorporated in over ten bills. For example, the passage of the American Recovery and Reinvestment Act of 2009 authorized $1.1 billion for comparative effectiveness research. Comparative effectiveness, when costs are formally considered, offers the hope of efficient resource allocation within U.S. health care markets. However, the future operationalization and implementation of comparative effectiveness is uncertain, and there exist potentially negative, and unintended, consequences under certain scenarios. One example, and the focus of our paper, is pharmaceutical innovation. Incentives for pharmaceutical R&D could be affected if drug development costs increase as a result of firms having to bear, directly or indirectly, the costs of running larger, randomized, head-to-head comparative effectiveness trials. While this may, or may not, be the case with current and future comparative effectiveness legislation, and its subsequent implementation, the potential consequences for pharmaceutical innovation warrant recognition. This is purpose of the paper. To achieve this goal, we develop several models of clinical trial design, drug development costs, and R&D investment. By example, we shed light on the causal links between the models and the ways in which industry R&D investment can be affected